Bharati Shipyard: Debt Takeover

It’s a one of its kind take over – a debt takeover that sets a precedent for India’s asset reconstruction companies and offers hope in resolving the crushing pile of non-performing assets burdening Indian banks. This week, our top story is about how Edelweiss ARC has taken control of the beleaguered Bharati Shipyard, its plans to revive the business and what this means for ARCs in India.

This giant cargo ship has no takers. It was built a couple of years ago at this Bharati Shipyard in Goa. But faced with a shipping downturn the company that ordered it no longer wants it. Therein lies the story of Bharati Shipyard, a company founded by two naval architects in 1973.

Bharati started with a small ship building yard in Ratnagiri and over the decades added five more. It went to public in 2004 and in 2009 Bharati fought a bruising and expensive battle with rival ABG Shipyards to acquire Great Offshore Shipping. It cost the company its future. Soon after in 2011 a downturn in the shipping industry and an Rs 8,000 crore debt burden pushed Bharati into a corporate debt restructuring (CDR) scheme. However the CDR failed; Bharati was quite literally at sea.

Financial services group Edelweiss set up an asset reconstruction business in 2010. At the time ARCs in India focused mostly on asset stripping - Buying an asset with a 5 percent contribution and then selling it in pieces. In 2013 Reserve Bank of India (RBI) changed the rules forcing ARCs to have more skin in the game. Now ARCs contribute 15 percent of the asset value.

Sibi Antony- MD & CEO,Edelweiss ARC

Antony: When we came in business in 2010 there was no sale by any bank. There was no sale of assets by the banks. In 2013 after the present governor came in and took charge he suggested that all banks should utilise the ARC infrastructure to manage their non-performing assets (NPAs). That was the time, post, precisely September 13th the banks started selling fresh NPAs. When I say, fresh NPAs it is NPAs of vantage one to two years, where the viability is still not lost. That is how 2013 onwards large scale sale happened and that is how Bharati came.

Doshi: That was 2014 Sibi Antony got an opportunity to fulfill the ARCs desire to focus on revival and not asset striping. Edelweiss brought 60 percent of the debt that Bharati Shipyard owed.

Antony: This has been our demand – the banks should sell the asset as a consortium to one ARC. This was one of the first consortium sales done by the bank. Second factor was the asset was priced right. We felt it was priced right.

Doshi: Edelweiss bought 60 percent of the Rs 8,000 crore of debt at 30 percent of the loan value that is Rs 1,600 crore. At that time the 5 percent rule applied requiring Edelweiss to invest Rs 80 crore. It took Edelweiss another 15 months to acquire the next 10 percent of debt. However, this time at 15 percent of the loan value because the rules had changed to a 15 percent contribution. That is another Rs 18 crore, taking Edelweiss’s total investment to Rs 98 crore.

Antony: That aggregation has been a challenge because one - the bankers have to take a hit more than 70 percent. So, if we have to buy it at a viable price they should take a hit of around 80-85 percent. This is a challenge for them.

Doshi: That is a consequence of the move from 95: 5 to 85:15.

Antony: We look at earning of around 18 percent which is very reasonable in a business like this. It is a very risky business. If we have to get that 18 percent return I need to recover 150 percent of my acquisition value and in a 15:85 that has to happen. If I recover 150 percent the major beneficiary continues to the bank.

Doshi: But any investment recovery depends on a revival of the business. Currently Bharti has 63 ships under various stages of construction but no money to build them. Last year Edelweiss had to sell a Bharti windmill for Rs 55 crore to pay 7 months of unpaid salaries. This year it loaned Bharti Rs 30 crore to complete work on a vessel. It is a challenge to keep the business afloat.

Antony: We have drawn up a short term, medium term and a long term plan for this company. In the short term we should keep the yards running, in the medium term we identified a few ships, presently we are thinking around 6-8 ships which can be completed. Our estimates, we put around Rs 400-500 crore fresh money.

Doshi: Where is this Rs 400-500 crore of fresh money going to come from?

Antony: That is what our endeavour is now. We have two funds coming up. Term sheet is in the final stages. We should be able to tie-up the same thing in three months time.

Doshi: This is a unique takeover, right? Because it is a debt led takeover and not an equity led takeover which is what the country has been conventionally used to. I want you to explain to me how the modalities of this work. Is it your CEO who runs the show, what happens to the incumbent management, the erstwhile promoters, how do you balance all of this?

Antony: They are all there. As I said the promoters are committed. It has a management but management bandwidth has been eroded a little because when the company becomes slightly distressed good people leave, that is the normal tendency. However since the stakes are very high, we thought we should give the bandwidth to the management. So, we setup a committee of the existing two promoters and the interim CEO to take all critical decisions of this company going forward.

Finally we need to revive and find a strategic investor for this company. Why I said strategic investor is a must because this business works on non-fund based bank guarantees and letters of credit. This company cannot get bank guarantee anymore because all banks have invoked the guarantees and the company is in this stage because of that.

So, if they have to get new orders, they need a different management with deep pockets, may be foreign collaboration or foreign strategic investors, it has to happen.

Doshi: Edelweiss hopes to be able to exit the Bharti project in another two to three years. It hopes by then the shipping industry will recover. There are other kinds of cleaning up to do as well.

Antony: This cleaning up is, today company has Rs 8000 crore of secured lenders, there are 100 odd unsecured lenders.

Doshi: How many of them have filed winding up petitions?

Antony: All of them will come to file. 12 of them have filed winding up petitions which has been accepted in the court. So, that crystallised amount is being paid by us.

Doshi: How much is that?

Antony: It is around Rs 9 crore.

Doshi: These are not bond holders?

Antony: These are all mainly vendors. Company is registered with BIFR so hopefully there won't be any further cases filed against the company.

Then we need to design a resolution strategy or restructuring scheme which has to be approved by the BIFR.

Doshi: Have you worked out what is the best case scenario and the worst case scenario? The worst case scenario is you don't recover anything and you lose all Rs 130 crore that you have invested in this asset.

Antony: We won't lose that. This Rs 100 crore is 5:95 and 15:85. In any recovery the management fee plus the recovery will take care of the capital investment. Worst case scenario, if we sell all the assets we will get around Rs 1000 crore. That Rs 1000 crore will take care of the year investment and the return.

Doshi: The best case scenario?

Antony: Best case scenario, we should be able to recover maybe around Rs 6000 crore plus.

Doshi: I am told that Leela Hotels is the other such instance of a debt led takeover. There does seem to be a mindset change after the Bharti Shipyard story because you have both banks and promoters now more willing to do such deals and work with ARCs to revive businesses. In fact Sibi tells me that he now has four to five cases where he expects to participate in management in such a debt led takeover and help turn the business around.